Canada's gross domestic product in the fourth quarter expanded by 2.6% on an annualized basis, exceeding expectations. A surge in consumer spending, business investments, and exports fueled the growth, according to data released on Friday. Analysts had anticipated a 1.8% increase in GDP for the quarter, in line with previous predictions.
Statistics Canada revised the third-quarter growth rate to 2.2%, up from the initial 1% estimate. The economy expanded by 0.2% in December compared to the contraction in November, driven by robust retail sales growth starting in mid-December.
Monthly GDP figures are calculated based on industrial output, while quarterly figures are based on spending and expenditure. An advance estimate indicates an expected 0.3% growth in January.
Following the positive data, the Canadian dollar strengthened by 0.15% against the U.S. dollar to 1.4417, equivalent to 69.36 U.S. cents. Yields on the two-year government bond rose by 1.6 basis points to 2.639% post-release of the data.
Household spending, representing over half of total GDP, saw a notable 1.4% increase in the fourth quarter, the largest surge since the second quarter of 2022 as per Statscan. Residential construction rose by 3.9%, marking the most substantial quarterly increase since the first quarter of 2021. Business investments, which had shown sluggish growth in the past 11 quarters, grew by 0.7% in Q4, particularly driven by a 4.2% rise in machinery and equipment investment.
On a per capita basis, real GDP saw a 0.2% rise in the fourth quarter, the second increase in seven quarters. Canada's economy, which faced sluggishness last year, has exhibited recent improvement with lowering interest rates from the mid of last year. The Bank of Canada has reduced rates by 200 basis points until January, bringing them down to 3% to stimulate economic growth amid concerns about reduced immigration numbers and U.S. impacts on growth.
Avery Shenfeld, managing director and chief economist at CIBC, mentioned that the positive fourth-quarter GDP growth suggests optimism for 2025 prospects and could prompt a pause in the rate-cutting cycle of the Bank of Canada if not for tariff threats.
Shenfeld warned that imposing 25% sweeping tariffs could affect nearly all Canadian exports as early as March 4, potentially leading to a rate cut in the upcoming BoC's decision on March 12. Subsequent to the data release, currency markets slightly reduced their expectations of a 25 basis point rate cut next month to below 50%.